Mongolian Asset Recovery Agency

Following the liquidation of People’s and Insurance Banks, the government created three institutions: MARA (for nonperforming assets), Savings Bank (which could only invest in safe assets and hold household deposits), and Reconstruction Bank (which could only provide banking services to businesses with deposits in the failed banks). The government issued government bonds to Savings Bank and Reconstruction Bank to replace the bad assets and contribute to their initial capital. The Asian Development Bank (ADB) provided a $35 million Financial Sector Program Loan (FSPL) to capitalize the new banks (World Bank 1997).

The government decrees and orders establishing MARA do not appear to be available digitally. The government developed the plan for the creation and activities of MARA in conjunction with the Asian Development Bank (Asian Development Bank 1996). Additionally, the Law of Mongolia on Banking, passed in 1996, established the process through which receivership would occur.^FNUnofficial English translation of this law by Lehman Law can be found at http://lehmanlaw.mn/wp-content/uploads/2016/04/Banking1996.pdf. The law allowed the Bank of Mongolia to pursue receivership if the appointment of a conservator had failed to regulate the behavior of the bank or if the bank had become insolvent (Parliament of Mongolia 1996). The law required the receiver to arrange for the assets of the bank to be assumed by others, while ensuring that depositors received first priority among creditors (Parliament of Mongolia 1996).

MARA technically received “expedited access to the courts, having its cases heard by judges who are specialists in this field of law” (World Bank 1997). However, the courts and individual judges did not typically understand the legitimacy of MARA to claim nonperforming assets on behalf of the Ministry of Finance. Judges also had a weak understanding of these transactions in general, since the two-tier banking system had existed for only seven years since the breakup of the monobank system (Bold Magvan, email message to author, March 14, 2021).^FNBold Magvan was the Deputy Governor of the Bank of Mongolia from 1996-2000.

While MARA initially set out with a defined goal of recovering 90% of assets transferred to it in the first three years, this was not the sole mandate of MARA (World Bank 1997). According to an IMF Research Paper, the goal of MARA was “not only to minimize the cost of the bank restructuring operation, but also to set an example of financial discipline and the enforcement of loan contracts.” MARA attempted to rebuild confidence in the banking sector through the litigation of defaulting borrowers through the legal system of Mongolia (Enoch, Gulde, and Hardy 2002). The agency also attempted to actively restructure delinquent enterprises, but achieved little success due to the limited capacity of MARA and the politicization of its activities.

Initially, officials had proposed to make MARA an incorporated public enterprise because that structure would allow the asset management agency to maintain a nonpolitical categorization. Additionally, MARA hired staff from the liquidated banks with performance-based contracts, which would assimilate easier into a public enterprise. However, Mongolian authorities created MARA as a government agency, since they desired MARA to carry governmental standing in order to provide stability to the banking sector (Enoch, Gulde, and Hardy 2002).

In 2000, MARA transitioned into the “Asset Recovery Department” within the Ministry of Finance (KDI and KOICA 2004). In 2002, Government Resolution 109 transformed MARA from a government agency into a state-owned enterprise (Minister of Finance and Economy 2002).

There is no further publicly available information on the internal organizational structure of MARA, nor annual reports or audits.

The government initially provided 21 billion Mongolian tugriks ($29.4 million) in government bonds to MARA at its creation to cover the nonperforming assets of the failed banks (World Bank 1997).

The ADB provided a $35 million FSPL to Mongolia to finance the banking sector restructuring (World Bank 1997). The receiver sold all of the assets of the liquidated banks to MARA in return for interest-bearing government restructuring bonds, which MARA financed with the FSPL funds. The receiver then transferred the deposits of the liquidating banks, as well as the restructuring bonds, to the Savings and Restructuring Banks. Finally, MARA sold “liquid and fixed assets and performing loans” to the other two successor institutions against cash and bonds (Asian Development Bank 1996).^FNSome references state that the government assumed responsibility for all of the inherited and directed loans in the banking system, including those in institutions not being liquidated (World Bank 1997). However, it is not clear if those loans were placed into MARA or simple assumed by the government.

The restructuring bonds were issued with a maturity of one month, with government assurances that they would be rolled over continuously. The interest rate on the bonds was slightly higher than the interest rate set by the Bank of Mongolia, which hovered around 4% for 1997. The bonds were nonnegotiable and available only to banks (Enoch, Gulde, and Hardy 2002).

While MARA was created as a direct response to the insolvency and liquidation of the People’s and Insurance Banks, its activities were not limited to just those institutions. MARA later took on the following failed banks: Reconstruction Bank (which was created alongside MARA), HOTSH Bank and Central Asia Bank (KDI and KOICA 2004).^FNIt is not clear if Mongolia considered the bankruptcies of these banks to be the result of the same crisis that necessitated the creation of MARA. It is unclear if MARA followed a set criteria for eligible institutions, whether private or public.

MARA did not seem to place a restriction on which assets could be obtained. About 70% of the non-performing assets assumed by MARA in 1997 were small to medium sized loans to individuals. The other 30% of assets were defaulted loans to enterprises for large investment projects, which the World Bank cites as requiring “extensive loan workout” (World Bank 1997).

While the two failed banks were closed without warning; there is no documentation for how the directed and inherited loans in the nonliquidated commercial banks were taken over by MARA.^FNThe closing of the failed banks required 900 agents to simultaneously enter 100 branches at the close of business on Friday, December 13, 1996, to prevent any destruction of records. On Monday, the branches of the People’s Bank reopened as the Savings Bank, while Insurance Bank became the Reconstruction Bank (Enoch, Gulde, and Hardy 2002). However, an IMF research paper states that the government accepted responsibility for these loans and acquiesced to swapping bonds for the directed and inherited loans, which amounted to about $11 million by the end of 1996 (Enoch, Gulde, and Hardy 2002).

There is no information available on specific pricing strategies used to assess and assume the nonperforming assets.

The stated goal of MARA was to maximize recovery of the nonperforming loans received from the failed banks. This goal included providing financial discipline and normalizing loan contract enforcement within the Mongolian financial system, rather than simply minimizing losses. MARA could utilize the following techniques for recovering loans: “netting loans against deposits, renegotiating loans, seizing collateral, and initiating bankruptcy proceedings” (Enoch, Gulde, and Hardy 2002). MARA never implemented its ability to initiate bankruptcy proceedings.

According to a World Bank report from 1997, MARA intended to create a “Bulk Sales Program,” in which moderate-size loans would be packaged together and sold to individual investors rather than commercial banks at a significant discount. About 70% of the nonperforming assets assumed by MARA in 1997 were from small to medium-size loans to individuals, which made the Bulk Sales Program more attractive than individual sales. After the completion of the Bulk Sales Program, MARA intended to seek to delegate the remainder of the loan recovery efforts to commercial banks, through the creation of a secondary market created by the government (World Bank 1997). This secondary market was never created, and it is unclear if the Bulk Sales program ever materialized.

As a state-owned enterprise in 2002, MARA was allowed to sell recovered assets at a discount, through an auction process (World Bank 2005).

An initial report on the Mongolian banking sector restructuring stated that MARA had a three-year lifespan when created, with the hopes of transitioning debt recovery duties to commercial banks (World Bank 1997). However, the creation of MARA did not result in a fully healthy and stable banking system, as other banks began to fail. This development was expected at the time, since the Mongolian government did not have the funds available to liquidate all of the insolvent banks at once. This included the Reconstruction Bank, which was intended to facilitate enterprise deposits originally in the People’s and Insurance Banks (KDI and KOICA 2004). As a result of this, MARA existed in its various forms until at least 2005 (World Bank 2005).